Transcript Chapter 6
CHAPTER 6 STRENGTHENING A COMPANY’S COMPETITIVE POSITION: SCOPE OF OPERATIONS STRENGTHENING A FIRM’S MARKET POSITION VIA ITS SCOPE OF OPERATIONS Defining the Scope of the Firm’s Operations Range of its activities performed internally Breadth of its product and service offerings Extent of its geographic market presence and its mix of businesses Size of its competitive footprint on its market or industry 6–2 CORE CONCEPTS ♦ Horizontal scope is the range of product and service segments that a firm serves within its focal market. ♦ Vertical scope is the extent to which a firm’s internal activities encompass one, some, many, or all of the activities that make up an industry’s entire value chain system, ranging from rawmaterial production to final sales and service activities. 6–3 HORIZONTAL MERGER AND ACQUISITION STRATEGIES Merger ● Is the combining of two or more firms into a single corporate entity that often takes on a new name. Acquisition ● Is a combination in which one firm, the acquirer, purchases and absorbs the operations of another firm, the acquired. 6–4 BENEFITS OF INCREASING HORIZONTAL SCOPE Increasing a firm’s horizontal scope strengthens its business and increases its profitability by: ● Improving the efficiency of its operations ● Heightening its product differentiation ● Reducing market rivalry ● Increasing the firm’s bargaining power over suppliers and buyers ● Enhancing its flexibility and dynamic capabilities 6–5 STRATEGIC OJECTIVES FOR HORIZONTAL MERGERS AND ACQUISITIONS Creating a more cost-efficient operation out of the combined companies. Expanding the firm’s geographic coverage. Extending the firm’s business into new product categories. Gaining quick access to new technologies or complementary resources and capabilities. Leading the convergence of industries whose boundaries are being blurred by changing technologies and new market opportunities. 6–6 WHY MERGERS AND ACQUISITIONS SOMETIMES FAIL TO PRODUCE ANTICIPATED RESULTS Strategic Issues: ● Cost savings may prove smaller than expected. ● Gains in competitive capabilities take longer to realize or never materialize at all. Organizational Issues ● Cultures, operating systems and management styles fail to mesh due to resistance to change from organization members. ● Loss of key employees at the acquired firm. ● Managers overseeing integration make mistakes in melding the acquired firm into their own. 6–7 VERTICAL INTEGRATION STRATEGIES Vertically Integrated Firm ● Is one that participates in multiple segments or stages of an industry’s overall value chain. Vertical Integration Strategy ● Can expand the firm’s range of activities backward into its sources of supply and/or forward toward end users of its products. 6–8 TYPES OF VERTICAL INTEGRATION STRATEGIES Vertical Integration Choices Full Integration Partial Integration Tapered Integration 6–9 TYPES OF VERTICAL INTEGRATION STRATEGIES Full Integration ● Partial Integration ● A firm participates in all stages of the vertical activity chain. A firm builds positions only in selected stages of the vertical chain. Tapered Integration ● Involves a mix of in-house and outsourced activity in any stage of the vertical chain. 6–10 THE ADVANTAGES OF A VERTICAL INTEGRATION STRATEGY Benefits of a Vertical Integration Strategy Add materially to a firm’s technological capabilities Strengthen the firm’s competitive position Boost the firm’s profitability 6–11 CORE CONCEPTS ♦ Backward integration involves entry into activities previously performed by suppliers or other enterprises positioned along earlier stages of the industry value chain system ♦ Forward integration involves entry into value chain system activities closer to the end user 6–12 INTEGRATING BACKWARD TO ACHIEVE GREATER COMPETITIVENESS Integrating Backwards By: ● Achieving same scale economies as outside suppliers— low-cost based competitive advantage. ● Matching or beating suppliers’ production efficiency with no drop-off in quality—differentiation-based competitive advantage. Reasons for Integrating Backwards: ● Reduction of supplier power ● Reduction in costs of major inputs ● Assurance of the supply and flow of critical inputs ● Protection of proprietary know-how 6–13 INTEGRATING FORWARD TO ENHANCE COMPETITIVENESS Reasons for Integrating Forward: ● To lower overall costs by increasing channel activity efficiencies relative to competitors. ● To increase bargaining power through control of channel activities. ● To gain better access to end users. ● To strengthen and reinforce brand awareness. ● To increase product differentiation. 6–14 DISADVANTAGES OF A VERTICAL INTEGRATION STRATEGY Increased business risk due to large capital investment. Slow acceptance of technological advances or more efficient production methods. Less flexibility in accommodating shifting buyer preferences that require non-internally produced parts. Internal production levels may not be of sufficient volumes to allow for economies of scale. Capacity matching problems for efficient production of internally-produced components and parts. Requirements for different resources and capabilities. 6–15 OUTSOURCING STRATEGIES: NARROWING THE SCOPE OF OPERATIONS Outsourcing ● Involves farming out value chain activities to outside vendors. Outsource an activity if it: ● Can be performed better or more cheaply by outside specialists. ● Is not crucial to achieving sustainable competitive advantage. ● Improves organizational flexibility and speeds time to market. ● Reduces risks due to new technology and/or buyer preferences. ● Assembles diverse kinds of expertise speedily and efficiently. ● Allows the firm to concentrate on its core business, leverage key resources, and do even better what it does best. 6–16 THE BIG RISKS OF OUTSOURCING VALUE CHAIN ACTIVITIES Hollowing out resources and capabilities that the firm needs to be a master of its own destiny. Loss of control when monitoring, controlling, and coordinating activities of outside parties by means of contracts and arm’s-length transactions. Lack of incentives for outside parties to make investments specific to the needs of the outsourcing firm’s value chain. 6–17 CORE CONCEPTS ♦ A strategic alliance is a formal agreement between two or more separate companies in which they agree to work cooperatively toward some common objective. ♦ A joint venture is a partnership involving the establishment of an independent corporate entity that the partners own and control jointly, sharing in its revenues and expenses. 6–18 REASONS FOR ENTERING INTO STRATEGIC ALLIANCES When seeking global market leadership: ● Enter into critical country markets quickly. ● Gain inside knowledge about unfamiliar markets and cultures through alliances with local partners. ● Provide access to valuable skills and competencies concentrated in particular geographic locations. When staking out a strong industry position: ● Establish a stronger beachhead in target industry. ● Master new technologies and build expertise and competencies. ● Open up broader opportunities in the target industry. 6–19 CAPTURING THE BENEFITS OF STRATEGIC ALLIANCES Being sensitive to cultural differences Recognizing that the alliance must benefit both sides Picking a good partner Strategic Alliance Factors Ensuring both parties keep their commitments Structuring the decision-making process for swift actions Adjusting the agreement over time to fit new circumstances 6–20 THE DRAWBACKS OF STRATEGIC ALLIANCES AND PARTNERSHIPS Culture clash and integration problems due to different management styles and business practices. Anticipated gains do not materialize due to an overly optimistic view of the synergies or a poor fit of partners’ resources and capabilities. Risk of becoming dependent on partner firms for essential expertise and capabilities. Protection of proprietary technologies, knowledge bases, or trade secrets from partners who are rivals. 6–21